The uncertainty of Britain leaving the European Union adds to the currency woes of UK property companies already sidelined from raising more capital by a stock market that trades their shares at a discount to their underlying assets.
The combination handcuffs the ability of small real estate investment trust such as London-based Atlantic Leaf Properties, which has assets of £371.7 million and almost all of its shareholders in South Africa, to be a more widespread rand hedging opportunity for investors.
“Brexit has been more challenging on the equity side to raise capital,” Atlantic Leaf CEO Paul Leaf-Wright said by phone from Cape Town. “People say if this outcome happens then the pound might go up, and if that outcome happens the pound might go down, so depending on which way they think they tend to sit on the side and think maybe the euro or the dollar is a better investment.”
The uncertainty is compounded by the delay in Brexit from March to October, he said.
The challenges facing Atlantic Leaf as an option for local shareholders to hedge the rand – to invest in companies earning foreign currencies – also apply to other stocks in the UK Reit field that are listed on the JSE such as shopping mall owners Hammerson, Intu and RDI Reit. They have much greater size and share liquidity than Atlantic Leaf, although retail space valuations and rentals have been hit by internet sales.
The catch for the small Reit is that market conditions prevent raising more capital to increase liquidity in the first place.
In the past year, Atlantic Leaf sold its £22 million interest in a retail portfolio to concentrate on the warehousing and light industrial sectors in areas around Birmingham, Liverpool and Manchester.
Pressure on shopping centres by online sales – the so-called Amazon effect – has lowered the valuations of some of the company’s retail warehousing while its industrial holdings are benefiting from a sector that’s seeing growth in rentals and property values and isn’t as impacted by the rise of online sales, Leaf-Wright says.
“Atlantic Leaf has a good management team and a focused strategy,” Craig Smith, head of research and property at Johannesburg-based Anchor Stockbrokers, said in an interview.”Investors on the JSE however have access to other property rand hedges and the decision will therefore ultimately depend on the relative attractiveness of Atlantic Leaf versus other property rand hedges.”
Leaf-Wright is hoping that the industrial focus, a stable yield and average 10-year leases will attract investors. “On our current net asset value our projection is for more than a 10% yield, so that’s a very attractive rand-hedge yield that we offer that’s significantly higher than some of those other bigger companies,” he said.